Introduction 1. Executive summary FRS 108, Accounting Policies, Changes in Accounting Estimates and Errors (supersedes FRS

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3 The KPMG Guide: Improvements to Financial Reporting Standards incorporating FRSs 101, 108, 116, 117 and 124 i Contents Introduction 1 Executive summary 2 1. FRS 101, Presentation of Financial Statements (supersedes FRS ) Executive summary New definition for impracticable Fair presentation and departures from FRSs Classification of assets and liabilities Presentation and disclosure New disclosure on judgements made by management Other changes 9 2. FRS 108, Accounting Policies, Changes in Accounting Estimates and Errors (supersedes FRS ) Executive summary Selection of accounting policies Consistency required in application of accounting policies Changes in accounting policies Applying changes in accounting policies Fundamental errors vs. other material errors Correction of material prior period errors Impracticable More detailed disclosures are required Other changes FRS 116, Property, Plant and Equipment (supersedes FRS ) Executive summary Residual value Elements of cost Subsequent costs Depreciation Exchange of assets Assets under construction Revaluation model Derecognition Disclosures Transitional provisions Summary of comparisons between the revised IAS 16, FRS 116 and FRS FRS 117, Leases (supersedes FRS ) Executive summary Lease of land and buildings are considered separately Prepaid lease payments Leasehold property classified as investment property Initial direct costs Transitional provisions Summary of comparisons between the revised IAS 17, FRS 117 and FRS FRS 124, Related Party Disclosures (supersedes FRS ) Executive summary Scope and scope exemption Definitions Disclosures Summary of comparisons between the revised IAS 24, FRS 124 and FRS Appendices 1: Example notes of key sources of estimation uncertainty 37 2: Example notes on judgements made in applying accounting policies 39 3: Illustrative financial statement disclosures 40 4: Financial Reporting Standards and accounting pronouncements 43

4 1 The KPMG Guide: Improvements to Financial Reporting Standards incorporating FRSs 101, 108, 116, 117 and 124 Introduction The Malaysian Accounting Standards Board ( MASB ) embarked on an improvements project in July 2004 to review 13 of its existing Financial Reporting Standards ( FRSs ). The objective of MASB in undertaking the improvements project was to reduce or eliminate alternatives, redundancies and conflicts within the standards, in a bid to converge with the revised International Accounting Standards ( IASs ) issued by the International Accounting Standards Board ( IASB ). The 13 FRSs affected by the improvements project are: FRS Presentation of Financial Statements FRS Inventories FRS Accounting Policies, Changes in Accounting Estimates and Errors FRS Events After the Balance Sheet Date FRS Property, Plant and Equipment FRS Leases FRS The Effects of Changes in Foreign Exchange Rates FRS Related Party Disclosures FRS Consolidated and Separate Financial Statements FRS Investments in Associates FRS Interests in Joint Ventures FRS Financial Instruments: Disclosure and Presentation FRS Earnings per Share This KPMG Guide aims to highlight and provide guidance on the main changes from the following 5 FRSs, while the changes to some of the other FRSs will be covered in separate KPMG Guides: FRS Presentation of Financial Statements FRS Accounting Policies, Changes in Accounting Estimates and Errors FRS Property, Plant and Equipment FRS Leases FRS Related Party Disclosures The revised standards will apply to financial periods beginning on or after 1 January 2006.

5 The KPMG Guide: Improvements to Financial Reporting Standards incorporating FRSs 101, 108, 116, 117 and Executive summary FRS 101, Presentation of Financial Statements: Significant new requirements for disclosure are introduced as follows: judgements made by management in applying the accounting policies that have the most significant effect on the amounts recognised in the financial statements; and key assumptions concerning the future, and other sources of estimation uncertainty that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. A range of its existing requirements have been clarified namely: impracticable is now defined; and new criteria for classifying assets and liabilities as current. FRS 101 rationalises the topics covered as opposed to FRS , Presentation of Financial Statements: the requirements and guidance on choosing appropriate accounting policies have been moved to FRS 108, Accounting Policies, Changes in Accounting Estimates and Errors; and the presentation requirements for profit or loss for the period, formerly contained in FRS , Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies have been transferred to this standard. There are no transitional provisions contained in FRS 101 and therefore, any changes in accounting policies, including those affecting presentation, should be adopted retrospectively, unless impracticable. FRS 108, Accounting Policies, Changes in Accounting Estimates and Errors: FRS 108 rationalises the topics covered as opposed to FRS The criteria on when to make retrospective adjustments have been tightened up, in particular when to adjust retrospectively for errors and when an entity can assert that adjustment is impracticable, and when it cannot. Disclosure of changes in accounting policies, changes in accounting estimates and correction of errors have been improved. FRS 108 now requires an entity to disclose impending changes in accounting policies when an entity has yet to implement a new standard or an interpretation that has been issued but has not yet come into effect. The extent of disclosure required include an estimation of the possible impact that application of the new standard or interpretation will have on the entity s financial statements in the period of initial application. There are no transitional provisions contained in FRS 108 and therefore any changes in accounting policies or correction of errors, should be adopted retrospectively, unless impracticable. FRS 116, Property, Plant and Equipment: Each part of an item of property, plant and equipment ( PPE ) with a cost that is significant in relation to the total cost of the item shall be depreciated separately. The revised definition of residual value effectively means that the residual value of most assets is likely be immaterial. FRS 116 requires the effect of inflation to be taken into account in arriving at the residual value. The justification of non-depreciation on

6 3 The KPMG Guide: Improvements to Financial Reporting Standards incorporating FRSs 101, 108, 116, 117 and 124 Executive summary (cont d) the basis of high residual value (therefore immaterial depreciation charges) is no longer valid. The cost of a major overhaul or inspection is treated as a part ( component ) of the costs of an asset. The costs of dismantlement, removal or restoration should be included in the cost of property, plant and equipment. Depreciation of PPE is to continue until the asset is derecognised, even during the period the asset is idle. PPE acquired in a swap is measured at fair value unless it lacks commercial substance or the fair value of the assets exchanged cannot be reliably measured. FRS 117, Leases: Leasehold land and buildings are now required to be split into two elements in determining their classification as finance or operating lease. Since land has an indefinite economic life, if the title for a lease on the land does not pass to the lessee by the end of the lease term, the lease is deemed an operating lease. Such leasehold land is no longer classified as property, plant and equipment but classified as prepaid lease payments. A leasehold property held under an operating lease which meets the definition of investment property may be accounted for as an investment property, subject to fulfilling certain criteria. Initial direct costs are now defined (e.g. commissions, legal fees and internal costs that are incremental and directly attributable to negotiating and arranging a lease, but exclude general overheads) and prohibited from being immediately expensed off. The carrying amount of a leasehold land that had been revalued under FRS 116, Property, Plant and Equipment is to be regarded as the surrogate carrying amount of prepaid lease payments. FRS 124, Related Party Disclosures: The scope restriction to public listed companies and their subsidiaries has been removed and FRS 124 now applies to all entities (except exempt entities - see SOP 1), including state controlled enterprises. The revised standard requires related party disclosures in the separate financial statements of a parent, venturer or investor. The identities of related parties are no longer required to be disclosed. The home-grown scope exemption from making related party disclosures if it interferes with confidentiality protected by various laws has not been retained. The term key management personnel has been included in the definition in the revised standard and now clearly includes non-executive directors. Disclosure of the entity s parent and ultimate controlling party (if different). Additional disclosure of the next most senior parent that produces financial statements available for public use, if neither the parent nor the ultimate controlling party do so. Sub-classification of amounts payable to, and receivable from, related parties into different categories of related parties. Disclose that the terms of related party transactions are equivalent to those that prevail in arm s length transactions only if such terms can be substantiated.

7 The KPMG Guide: Improvements to Financial Reporting Standards incorporating FRSs 101, 108, 116, 117 and FRS 101, Presentation of Financial Statements (supersedes FRS ) Executive summary FRS 101, Presentation of Financial Statements, following the amendments to IAS 1, Presentation of Financial Statements, is still the back-bone to all the other financial reporting standards. For example, it contains the general rules concerning the presentation of a true and fair view, the format of the balance sheet, income statement and statement of changes in equity, and disclosure requirements, such as the name of the ultimate parent entity, that are applicable to all financial statements. Significant new requirements for disclosure are introduced as follows: judgements made by management in applying the accounting policies that have the most significant effect on the amounts recognised in the financial statements; and key assumptions concerning the future, and other sources of estimation uncertainty that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Existing requirements have been clarified as follows: impracticable is now defined; and new criteria for classifying assets and liabilities as current. FRS 101 rationalises the topics covered, as opposed to FRS ; Presentation of Financial Statements: the requirements and guidance on choosing appropriate accounting policies have been moved to FRS 108, Accounting Policies, Changes in Accounting Estimates and Errors; and the presentation requirements for profit or loss for the period, formerly contained in FRS , Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies have been transferred to this standard. There are no transitional provisions contained in FRS 101 and therefore, any changes in accounting policies, including those affecting presentation, should be adopted retrospectively, unless impracticable. 1.1 Impracticable is defined and is still the only get-out from requirements if the effect of applying them would be material (101.11, 38-40, 122, BC38-40) New definition for impracticable The standard now contains a definition of impracticable, being that something is impracticable when the entity cannot apply it after making every reasonable effort to do so. Impracticable is retained as the only get-out from requirements to restate comparatives. It also has been included as the only get-out from the new requirements to discuss sources of key estimation uncertainty as discussed below. The proposal in the exposure draft, which was to relieve entities from these requirements if they would cause undue cost or effort, has not been retained. The reasoning for this is given in BC38-40 of the Basis of Conclusions to FRS Fair presentation of financial statements should comply with the Proposed Framework (101.13, 15) Fair presentation and departures from FRSs FRS 101 now contains a definitive statement as to what is required in order to give a true and fair view. This now emphasises that a fair presentation requires faithful representation of the effects of transactions, other events and conditions in accordance with MASB s Discussion Paper 1, A Proposed Framework for Preparation and Presentation of Financial Statements ( Proposed Framework ) s definitions and recognition criteria for assets, liabilities, income and expenses.

8 5 The KPMG Guide: Improvements to Financial Reporting Standards incorporating FRSs 101, 108, 116, 117 and 124 Compliance with FRSs, with additional disclosure as necessary, is presumed to give a true and fair view. The standard still expects that true and fair overrides will be extremely rare where application of FRSs would be so misleading and reiterates that, in virtually all circumstances, a true and fair view is achieved by compliance with applicable FRSs. A fair presentation requires an entity to present information in a manner that provides information that is: relevant; reliable; comparable; and understandable. Continuing disclosure of true and fair overrides required (101.19) Where a true and fair override has been invoked, FRS 101 now explicitly requires continuing disclosure if the departure in a prior period still has a consequential effect on the amounts recognised in the current period. New criteria for classifying assets as current (101.57) 1.3 The requirements and guidance for current and noncurrent have been clarified and strengthened ( ) Classification of assets and liabilities The requirements and guidance relating to the classification of current and non-current assets and liabilities have been clarified. FRS requires a balance sheet to be classified between current and non-current assets and current and non-current liabilities. A balance sheet presentation based on the order of liquidity would be acceptable only when it provides more reliable and relevant information. Criteria for classifying assets as current FRS defines current assets as those assets that: are either expected to be realised in, or are held for sale or consumption in, the normal course of the entity s operating cycle; held primarily for trading purposes; expected to be realised within 12 months of the balance sheet date; or cash or a cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least 12 months after the balance sheet date. Therefore, an item or an asset held for trading will always be a current asset. Operating cycle refers to the time between the acquisition of assets for processing and their realisation in cash or cash equivalents. In the case of property development entities, the normal operating cycle may range from 2 to 3 years and as such land held for property development is classified as current (as property development costs) when development activities have commenced and where it can be demonstrated that such activities can be completed within the operating cycle. FRS A requires that a non-current asset that is classified as held for sale and the assets of a disposal group classified as held for sale should be presented separately from other assets in the balance sheet. Likewise, the liabilities of a disposal group classified as held for sale should be presented separately from other liabilities in the balance sheet. Those assets and liabilities shall not be offset and presented as a single amount New criteria for classifying liability as current (101.60) Criteria for classifying liabilities as current Liability is classified as current when it satisfies any of the following criteria: it is expected to be settled in the entity s normal operating cycle; it is held primarily for trading purposes;

9 The KPMG Guide: Improvements to Financial Reporting Standards incorporating FRSs 101, 108, 116, 117 and it is due to be settled within 12 months after the balance sheet date; the entity does not have an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Again, a liability held primarily for the purpose of being traded is to be classified as current. Classification of liabilities now has to be based strictly on circumstances at the balance sheet date ( ) An entity will no longer be able to take into consideration post-balance sheet refinances, amendments, waivers, etc. in classifying liabilities at the balance sheet date. The rationale for it is that the refinancing of a liability or the rescheduling of payments on a long term basis after the balance sheet date does not affect the entity s liquidity and solvency at balance sheet date. This means that a loan will be classified as a current liability, if at the balance sheet date it is due for repayment within the following 12 months, unless the entity has the right to refinance or rollover the loans and it expects to do so. Under FRS 101, it is irrelevant whether a refinancing or rollover, which was not at the entity s discretion at the balance sheet date, is obtained after the balance sheet date but before the date the financial statements are authorised for issue. This will be instead a matter for disclosure as a non-adjusting post balance sheet event. The same rule applies if an entity breaches an undertaking before the balance sheet date, which makes the loan payable on demand, unless the lender grants a grace period of more than 12 months from the balance sheet date, and this grace period is obtained before the balance sheet date Presentation requirements for profit or loss for the period is now in FRS Disclosure of items of income and expense as extraordinary is prohibited (101.85, BC14-18) Presentation and disclosure Presentation requirements for profit or loss now in FRS 101 The presentation requirements for profit or loss for the period, formerly contained in FRS , Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies have been transferred to FRS 101. Extraordinary items are banned FRS 101 specifically prohibits the presentation of income and expense items as extraordinary. Currently this topic is dealt with in FRS (superseded by FRS 108), which allows extraordinary items in some extremely rare circumstances. By implication, once FRS 101 becomes effective, the term ordinary activities becomes redundant and should be avoided. FRS 101 BC14 to 18 discuss the rationale for the ban; extraordinary items result from the normal business risks faced by the entity and as such do not warrant presentation in a separate component of the income statement. The nature or function of a transaction or other event, rather than its frequency, should determine its presentation within the income statement. Items currently classified as extraordinary are only a subset of the items of income and expense that may warrant disclosure to assist users in predicting an entity s future performance All individually material items should be separately disclosed ( , 11-12) Separate disclosure required for individually material items The requirement to disclose individually significant items, which is currently in FRS , has also been moved to FRS 101. However, instead of the FRS requirement to disclose items that are of such size, nature and incidence that their disclosure is relevant to explain the performance of the entity for the period, FRS 101 now simply states that when items of income and expense are material, their nature and amount shall be disclosed separately. FRS 101 includes the same list of examples of individually material items, such as restructurings, litigation settlements and disposals of investments, used in FRS

10 7 The KPMG Guide: Improvements to Financial Reporting Standards incorporating FRSs 101, 108, 116, 117 and 124 Generally, the disclosure of individually material items can be on the face of the income statement or in the notes, depending on management s judgement ( ) Information to be presented on the face of the income statement ( , BC12-13) Whether or not disclosure of such items should be on the face of the income statement or in the notes is left to the judgement of management, as the requirement is that additional line items shall be presented on the face of the income statement when such presentation is relevant to an understanding of the entity s financial performance. However, there are separate rules being introduced in respect of discontinued operations, which do require primary statement disclosure. Further details are in the KPMG Guide discussing FRS 5, Non-current Assets Held for Sale and Discontinued Operations. Amended disclosure requirement on face of income statement FRS 101 requires separate disclosure on the face of the income statement of profit or loss attributable to minority interest and profit or loss attributable to equity holders of the parent. FRS 101 removes the requirement to disclose results from operating activities as a line item on the face of the income statement. The reason for this is that operating activities are not defined in the standard and the IASB decided not to require disclosure of an undefined item. However, an entity may elect to disclose the results of operating activities or similar line items, even though this term is not defined. In such cases, the IASB notes in BC13 that the entity should ensure the amount disclosed is representative of activities that would normally be considered to be operating. 1.5 Management will have to make new disclosures concerning key sources of estimation uncertainty and other judgements made in the application of accounting policies ( , 116) New disclosure on judgements made by management FRS 101 introduces significant new disclosure requirements concerning judgements made by management in the process of applying the entity s accounting policies that have the most significant effect on the amounts recognised in the financial statements. An entity is required to disclose in the summary of significant accounting policies or other notes, as appropriate, management s judgements in respect of the following: judgements made by management, apart from those involving estimations, in applying its accounting policies that have the most significant effect on the amounts recognised in the financial statements; and key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year The disclosures of information relating to key sources of estimation uncertainty would involve sensitivity analysis and explanations of changes in past assumptions ( ) Disclosure on key sources of estimation uncertainty In respect of the disclosure concerning key sources of estimation uncertainty, the nature and carrying amount of the affected assets and liabilities should be disclosed. The key assumptions and other key sources of estimation uncertainty disclosure relate to the estimates that require management s most difficult, subjective or complex adjustments. As the number of variables and assumptions affecting the possible future resolution of the uncertainties increases, those judgements become more subjective and complex, and the potential for a consequential material adjustment to the carrying amounts of assets and liabilities normally increases accordingly. An accounting estimate may be considered critical if: the estimate requires management to make assumptions about matters that were highly uncertain at the time the estimate was made; different estimates reasonably could have been used; changes in the estimate that would have a material impact on the Group s financial condition or results of operations are reasonably likely to occur from period to period.

11 The KPMG Guide: Improvements to Financial Reporting Standards incorporating FRSs 101, 108, 116, 117 and The following are examples of accounting estimates: bad debts; inventory obsolescence; fair value of financial instruments; fair value in a business combination; fair value of property; useful life of, or expected pattern of consumption of the future economic benefits embodied in, depreciable assets; and warranty obligations. FRS 101 provides examples of required disclosure in relation to key sources of estimation uncertainty ( ) In respect of the additional information needed, guidance in FRS 101 states that the nature and extent of information provided varies according to the nature of the assumption and other circumstances. However, it also lists examples of the types of disclosures made: the nature of the assumption or other estimation uncertainty; the sensitivity of carrying amounts to the methods, assumptions and estimates underlying their calculation, including the reasons for the sensitivity; the expected resolution of an uncertainty and the range of reasonably possible outcomes within the next financial year in respect of the carrying amounts of the assets and liabilities affected; and an explanation of changes made to past assumptions concerning those assets and liabilities, if the uncertainty remains unresolved. Certain new disclosure requirements of FRS 101 may already be satisfied by following the requirements of existing FRSs ( ) This list indicates that the information required could be far more revealing than current disclosures. However, no example disclosure is given in the standard and, in some cases, following the requirements of existing standards may already satisfy this new requirement. The examples given include: FRS , Provisions, Contingent Liabilities and Contingent Assets, requires disclosure, in specified circumstances, of major assumptions concerning future events affecting classes of provisions; FRS 132, Financial Instruments: Disclosure and Presentation, requires disclosure of significant assumptions applied in estimating fair values of financial assets and financial liabilities that are carried at fair value; FRS 116, Property, Plant and Equipment, requires disclosure of significant assumptions applied in estimating fair values of revalued items of property, plant and equipment. FRS disclosure requirement is not required for assets and liabilities measured at fair value ( ) The disclosure on key assumptions concerning the future and other key sources of estimation uncertainty that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year as required in paragraph 116 of FRS 101 is not required for assets and liabilities if, at balance sheet date, they have been measured at fair value based on recently observed market prices because using observed market prices (i.e. fair values) obviates the need for estimates. Appendix 1 provides examples of disclosures of key sources of estimation uncertainty as required by FRS Disclosures of other judgements may involve more detail in the policies disclosed or more information on the application of the policy to a specific transaction or item ( ) Disclosure on judgements made by management in applying accounting policies In respect of disclosing judgements made by management, other than those involving estimations, in applying the accounting policies, it appears from the discussion in FRS 101 that in some instances the disclosure will be a more detailed disclosure of accounting policy and in other cases, the disclosure may be of how judgement has been used in applying the policy to an individual circumstance. Examples given include: deciding whether financial assets will be held to maturity;

12 9 The KPMG Guide: Improvements to Financial Reporting Standards incorporating FRSs 101, 108, 116, 117 and 124 whether certain sales of goods are in substance financing arrangements and therefore should not give rise to revenue; and whether the substance of a relationship with a special purpose entity indicates that it should be consolidated. Certain disclosure required of management s judgements, other than those involving estimates, in applying accounting policies may already be satisfied by following the requirements of other FRSs ( ) FRS 101 acknowledges that requirements in this respect may already be included in other FRSs. Examples given include: FRS 127, Consolidated and Separate Financial Statements, requires disclosure of the reasons why an entity s ownership interest does not constitute control in respect of an investee that is not a subsidiary even though more than half of its voting or potential voting power is owned directly or indirectly through subsidiaries; FRS 140, Investment Property, requires disclosure of the criteria developed by the entity to distinguish investment property from owner-occupied property and from property held for sale in the ordinary course of business, when classification of the property is difficult. Appendix 2 provides examples of disclosure notes on judgements made in applying accounting policies as required by FRS If impracticable to disclose sensitivity analysis, the entity should include a general warning about future fluctuations ( ) Where it is impracticable to disclose the extent of the possible effects of a key assumption or another key source of estimation uncertainty at the balance sheet date, the entity has to disclose that: it is reasonably possible, based on existing knowledge, that outcomes within the next financial year that are different from assumptions could require a material adjustment to the carrying amount of the asset or liability affected. In all cases, the entity discloses the nature and carrying amount of the specific asset or liability (or class of assets or liabilities) affected by the assumption Minority interests are now part of equity and not a deduction from net assets or profit (101.68, 82, 96 & 97) Other changes Minority interests are now part of equity Under FRS 101 minority interests are to be treated as part of equity and not as a deduction from net assets as minority interest does not meet the definition of a liability. It follows that on the face of the income statement the total profit or loss for the period will be allocated between the minority interest and equity holders of the parent. Similarly, a reconciliation of movements in minority interests will need to be disclosed, either in the statement of changes in equity or in the notes, in the same way as is currently disclosed for all other categories of equity (such as share capital, retained earnings etc.). Appendix 3 illustrates a possible format of consolidated balance sheets, income statements and statements of changes in equity that illustrates the disclosure required by FRS Choosing accounting policies Finally, the requirements and guidance on choosing appropriate accounting policies have been moved from FRS to FRS 108.

13 The KPMG Guide: Improvements to Financial Reporting Standards incorporating FRSs 101, 108, 116, 117 and FRS 108, Accounting Policies, Changes in Accounting Estimates and Errors (supersedes FRS ) Executive summary FRS 108 rationalises the topics covered as opposed to FRS , Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies. The criteria on when to make retrospective adjustments have been tightened up, in particular when to adjust retrospectively for errors and when an entity can assert that adjustment is impracticable, and when it cannot. Disclosure of changes in accounting policies, changes in accounting estimates and correction of errors have been improved. FRS 108 now requires an entity to disclose impending changes in accounting policies when an entity has yet to implement a new standard or an interpretation that has been issued but has not yet come into effect. The extent of disclosure required include an estimation of the possible impact that application of the new standard or interpretation will have on the entity s financial statements in the period of initial application. There are no transitional provisions contained in FRS 108 and therefore any changes in accounting policies or correction of errors, should be adopted retrospectively, unless impracticable. 2.1 Rules on choosing appropriate accounting policies have moved to FRS 108 ( ) Selection of accounting policies The requirements relating to choosing appropriate accounting policies have been moved from FRS , Presentation of Financial Statements, to FRS 108. The requirements are similar to the existing FRS text. FRSs set out accounting policies that the MASB has concluded result in financial statements containing relevant and reliable information about transactions, other events and conditions to which they apply. Those policies need not be applied when the effect of applying them is immaterial. However, they include the warning that it is inappropriate to make, or leave uncorrected, immaterial departures from FRSs to achieve a particular presentation of an entity s financial position, financial performance or cash flows. For example, changing the classification of assets from non-current to current to rectify a net current liability position. In the absence of available accounting policies, management is required to use judgement in developing and applying accounting policies that will achieve information that is relevant and reliable (i.e. represents faithfully, reflect substance over form, is prudent, free from bias (neutral) and complete). Consistency in application of accounting policies is required (108.13) 2.2 Consistency required in application of accounting policies Entities are required to apply accounting policies consistently for similar transactions unless otherwise allowed by another standard or interpretation. 2.3 Limited circumstances for changing accounting policies ( & 16) Changes in accounting policies An accounting policy, once adopted, can only be changed provided the change is required by a standard or interpretation. An entity can also change existing accounting policies if and only if the change results in financial statements that provide reliable and more relevant information in respect of the entity s financial position, financial performance or cash flows.

14 11 The KPMG Guide: Improvements to Financial Reporting Standards incorporating FRSs 101, 108, 116, 117 and 124 It should be noted that the following are not changes in accounting policies: the application of an accounting policy for transactions that differ in substance from those previously occurring; and the application of a new accounting policy for transactions that did not occur previously or were immaterial. Applying changes in accounting policies - specific transitional provisions, voluntary changes ( ) The allowed alternative treatment in FRS for accounting for changes in accounting policies has been removed (108 BC4-11) Limitations on retrospective application for changes in accounting policies ( ) Applying changes in accounting policies Retrospective application is required FRS 108 requires an entity to account for a change in accounting policy resulting from the initial application of a standard or an interpretation in accordance with the specific transitional provisions. FRS 108 also requires voluntary changes in accounting policies to be applied retrospectively i.e., as if the new accounting policy had always been applied, by adjusting the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period. Removal of allowed alternative treatment in FRS The standard also removes the allowed alternative treatment previously provided in FRS As a result, comparative information for prior periods is presented as if new accounting policies had always been applied. This is in contrast to the current FRS which allows presentation in the current period income statement of the adjustment resulting from changing an accounting policy or the amount of a correction of a fundamental error, with comparative information from financial statements of prior periods presented unchanged. Limitations on retrospective application An entity shall apply the change in accounting policy retrospectively except to the extent that it is impracticable to determine either: the period-specific effects; or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of changing an accounting policy on comparative information for one or more prior periods presented, the entity shall apply the new accounting policy to the carrying amounts of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable, which may be the current period. In this respect, the entity shall also make a corresponding adjustment to the opening balance of each affected component of equity for that period. When it is impracticable to determine the cumulative effect, at the beginning of the current period, of applying a new accounting policy to all prior periods, the entity is required to adjust the comparative information to apply the new accounting policy prospectively from the earliest date practicable. 2.5 All material errors should be corrected by prior period adjustments unless impracticable (108.5 & 41-48) Fundamental errors vs. other material errors There is no longer a distinction between fundamental errors and other material errors. This means that all material errors (or immaterial errors made intentionally to achieve a particular presentation of an entity s financial position, financial performance or cash flows), should be corrected through

15 The KPMG Guide: Improvements to Financial Reporting Standards incorporating FRSs 101, 108, 116, 117 and prior period adjustments, to the extent practicable, together with disclosure of the details of the error and corrections made. This includes earnings per share ( EPS ) amounts under FRS 133, Earnings per Share, if the entity is required to disclose EPS. FRS 108 now includes a definition of material, which is the same as is included in FRS The allowed alternative treatment in FRS for correction of errors has been removed (108 BC4-11) Correction of material prior period errors Retrospective application is required As highlighted above, FRS 101 removes the allowed alternative treatment for corrections of errors. Consequently, an entity would no longer be permitted to include the amount of the correction of an error in profit or loss for the current period and present comparative information as it was reported in the financial statements of prior period. Instead, the correction of an error would be accounted for retrospectively in the first set of financial statements authorised for issue after their discovery by: restating the comparative amounts for the prior period presented in which the error occurred; or if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented Limitations on retrospective restatement for correction of material prior period errors ( ) Limitations on retrospective restatement The impracticable clause that limits the application of retrospective restatement is the same as that available for changing accounting policies i.e. an entity is required to correct material prior period errors retrospectively except to the extent that it is impracticable to determine either: the period-specific effects; or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an error on comparative information for one or more prior periods presented, the entity shall restate the opening balances of assets, liabilities and equity for the earliest period for which retrospective restatement is practicable, which may be the current period. When it is impracticable to determine the cumulative effect, at the beginning of the current period, of an error on all prior periods, the entity is required to restate the comparative information to correct the error prospectively from the earliest date practicable. 2.7 FRS 108 includes detailed rules and guidance on the meaning of impracticable (108.5, 24-27, 43-47, 50-53, BC23-29) Impracticable The standard contains some fairly detailed rules and guidance on the meaning of impracticable, presumably to tighten up on its use to justify not restating comparative information for prior periods or making required disclosures. There is an overriding requirement that entities should make every reasonable effort to apply a requirement before deciding that it is impracticable. This includes doing partial restatement to the extent practicable, even when full retrospective adjustments are impracticable. The reasoning for this is discussed in the Basis of Conclusions section. However, FRS 108 also states that if the retrospective adjustments would require assumptions about what management s intent would have been, or it is impossible to distinguish objectively what information provides evidence of what the circumstances were at the relevant past date, that would indicate that adjustment is impracticable.

16 13 The KPMG Guide: Improvements to Financial Reporting Standards incorporating FRSs 101, 108, 116, 117 and More detailed disclosures are required, including advance disclosure of the effect of changing accounting policies ( , & 49) More detailed disclosures are required This includes disclosure of impending changes in accounting policies when an entity has yet to implement a new standard or an interpretation that has been issued but has not yet come into effect. Previously such disclosures were encouraged by FRS , but not required. Note, however, that as FRS 108 does not come into effect until 1 January 2006, this requirement need not be applied in 2005 to disclose the effects of all the other changes the MASB is making this year. Example disclosure note Preparers of financial statements may use the following wording in the notes to the financial statements for the last financial year before the new/revised standards become effective to describe the possible impact of their future application: The Malaysian Accounting Standards Board has issued a number of new and revised Financial Reporting Standards ( FRSs ) which are effective for financial years beginning on or after 1 January 20X7. The Group has not early adopted these new FRSs in the financial statements for the year ended [Date]... i) Additional wording for situation 1 where the Group has commenced an assessment but is not in a position to state the impact: The Group has already commenced an assessment of the impact of these new FRSs but is not yet in a position to state whether these new FRSs would have a significant impact on its results of operations and financial position. ii) Additional wording for situation 2 where the Group has made a preliminary assessment and reached an initial conclusion on the impact: The Group is in the process of making an assessment of the impact of these new FRSs and has so far concluded that: [(a) the adoption of [name of the FRSs] would have the following significant effects: [Descriptions of the effects] OR (b) the adoption of [name of the FRSs] would not have a significant impact on its results of operations and financial position.] The Group will be continuing with the assessment of the impact of the other new FRSs and other significant changes may be identified as a result Summary of disclosure required ( , & 49) Summary of disclosures required when changing accounting policies and correcting prior period errors Changes in accounting policies - on initial application of FRSs or an interpretation or voluntary changes, disclose: identify change; whether change is in accordance with transitional provisions and description of transitional provisions; reasons why new accounting policy is reliable and more relevant (applies to voluntary changes only); amount of adjustment to each item; amount of adjustment to basic and diluted EPS;

17 The KPMG Guide: Improvements to Financial Reporting Standards incorporating FRSs 101, 108, 116, 117 and amount of adjustment to prior periods; and more disclosures required if application is impracticable. When new standard or interpretation not applied but issued and is not yet effective, disclose: the fact and estimate of impact of application now required (was encouraged before). Prior period errors, disclose: nature; amount of correction for each item; amount of correction for basic and diluted EPS; amount of correction at the beginning of earliest period; and if retrospective restatement is impracticable, more disclosures are required. Income statement presentation requirements have moved to FRS 101 ( ) 2.9 Other changes Finally, the requirements in relation to the income statement disclosure have been moved to FRS 101. This includes, in particular, the restrictions on disclosing extraordinary items (which in FRS 101 have now become a complete ban) and the requirement to disclose individually significant (now material ) items.

18 15 The KPMG Guide: Improvements to Financial Reporting Standards incorporating FRSs 101, 108, 116, 117 and FRS 116, Property, Plant and Equipment (supersedes FRS ) Executive summary Each part of an item of property, plant and equipment ( PPE ) with a cost that is significant in relation to the total cost of the item shall be depreciated separately. The revised definition of residual value effectively means that the residual value of most assets is likely be immaterial. FRS 116 requires the effect of inflation to be taken into account in arriving at the residual value. The justification of non-depreciation on the basis of high residual value (therefore immaterial depreciation charges) is no longer valid. The cost of a major overhaul or inspection is treated as a part ( component ) of the costs of an asset. The costs of dismantlement, removal or restoration should be included in the cost of property, plant and equipment. Depreciation of PPE is to continue until the asset is derecognised, even during the period the asset is idle. PPE acquired in a swap is measured at fair value unless it lacks commercial substance or the fair value of the assets exchanged cannot be reliably measured. 3.1 New definition of residual value (116.6) Residual value The definition of residual value has been revised. An entity is required to measure the residual value as the amount it estimates it would receive currently for the asset if the asset were already of the age and in the condition expected at the end of its useful life, i.e. the effects of inflation are to be taken into account in arriving at the residual value. FRS did not specify whether the residual value was to include the effects of inflation. FRS 116 now requires such effect to be taken into account in arriving at the residual value. Based on the revised definition, the residual value of most assets are likely to be immaterial and hence depreciation is required for most assets, including hotel properties. In addition, paragraph 56 of FRS which said that There are circumstances, for example in the case of hotel properties and brewer properties, where an enterprise may adopt the view that depreciation is immaterial..., has been removed. Hence, all hotel properties need to be depreciated once FRS 116 takes effect. As there is no transitional provision on this, the change in accounting policy should be applied retrospectively in accordance with FRS 108, Accounting Policies, Changes in Accounting Estimates and Errors. How to deal with depreciation charge when the residual value increases ( ) Under FRS 116, entities are required to review the residual value at least at each balance sheet date. FRS 116 states that depreciation is recognised even if the fair value of the asset exceeds its carrying amount, as long as the asset s residual value does not exceed its carrying amount. If the residual value increases to an amount equal to or greater than the asset s carrying amount, the asset s depreciation charge is zero unless until its residual value subsequently decreases to an amount below the asset s carrying amount.